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UPDATE 1-Bombardier faces discount headache as CSeries sales take off

Published 2016-06-04, 07:45 a/m
© Reuters.  UPDATE 1-Bombardier faces discount headache as CSeries sales take off
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* Bombardier woos new CSeries buyers at key airline meetings
* Accounting charge sheds rare light on aircraft pricing
* Bombardier CEO says CSeries re-launched and 'here to stay'

(Adds comments by Lufthansa CEO, background)
By Tim Hepher and Victoria Bryan
DUBLIN/ZURICH, June 4 (Reuters) - Bombardier BBDb.TO is
stepping up efforts to woo the airline industry with its more
efficient new CSeries jet, hoping to win new orders without
falling under the spell of prolonged discounting on price.
The Canadian planemaker flew top executives to a meeting of
international airlines in Dublin this week, where it sought to
build on a much-needed order from Delta Air Lines (NYSE:DAL) DAL.N , and
on Friday then flew the heads of Star Alliance member airlines
from Dublin to Zurich.
"We are in a good place today. We have the contracts ready
for you as you exit the plane," Chief Executive Alain Bellemare
joked to the 28 top airline executives on board the 110-seat
aircaft.
While the cash-squeezed project was saved from a near-death
experience with Delta's discounted order, Bombardier's rivals
and others in the industry predict it will remain on the rack a
while longer as others demand equal bargains.
"I want the best deal, better than Delta," said Tewolde
Gebremariam, chief executive of Star Alliance member Ethiopian
Airlines.
While he probably won't get that, having expressed an
interest in acquiring only 10 to 15 jets rather than the 75
bought by Delta, his remark illustrated Bombardier's challenge.
"The question is whether or not Bombardier will be
successful in raising prices," said Bertrand Grabowski, a
managing director of Germany's DVB Bank.
"For this to happen, it needs ... a steady growth market."
Bombardier's task is not made easier by an outbreak of
transparency in the secretive jet market after it was forced by
Canadian accounting rules to take a $500 million charge for the
Delta deal and two others covering a total of 127 planes.
Rival jetmakers and analysts quickly calculated Delta had
paid $22-23 million a plane, a whopping two-thirds discount.
Macquarie analyst Konark Gupta wrote Bombardier could have
difficulty getting the CSeries to break even by 2020-21 if it
keeps selling at such prices. Others say it has limited choice.
"I think they have got their work cut out trying to convince
others to pay maybe $10-15 million more (than Delta) - why would
they?" said Airbus executive vice-president Chris Buckley.

'IMPOSSIBLE' STANDARD
Bombardier additionally faces accusations of price dumping
from rival Embraer EMBR3.SA , which it denies.
"We have to show the market that this price level is
unsustainable," Embraer's commercial chief Paulo Cesar Silva
said.
Industry sources say Airbus leased jets as try-outs for as
little as $1 a month to enter the U.S. market in the 1980s, but
found itself trapped at low prices for years after that.
But deals are usually kept secret and Bombardier's provision
shed unusual light on what it can take to kick-start sales for
new aircraft.
"The next big guy Bombardier talks to is going to say 'will
you be taking a $500 million loss for me'?" an industry source
said.
Analysts say previous Bombardier managers sacrificed sales
by refusing to bow to cut-throat competition in the jet market.
But asked on Saturday if he now wanted to renegotiate on price,
the head of Lufthansa LHAG.DE , the CSeries jet's first
customer, said no.
"As the launch customer you get a very interesting price.
That applied to Lufthansa and I'm sure it applied to Delta too,"
Chief Executive Carsten Spohr said.
Lufthansa's subsidiary airline Swiss will be the first to
use the new jet.
Bombardier's new leaders acknowledge being more aggressive
in the market to reboot the troubled CSeries project but dismiss
the reported discounts, saying they fail to reflect shifting
costs.
While chasing new customers, they must also prevent existing
ones delaying delivery or cancelling.
Industry sources estimate as many as 100 of the 325 orders
are at risk owing to the patchy finances of some early
customers.
But the recent order boost does give the company more
visibility on production and strengthens the profile of its
order book: two other parameters watched by investors.
"If you question some orders, we would not debate that,"
Bellemare said. "We have re-launched the programme. A year ago
there were a lot of questions about the CSeries' future: not any
more. The aircraft is here to stay."

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